Lecture 8: Earmarking and Financial Funds

Lecture 8: Earmarking and Financial Funds

Professor Anna Nagurney

John F. Smith Memorial Professorand

Director – Virtual Center for SupernetworksIsenberg School of Management

University of MassachusettsAmherst, Massachusetts 01003

SCH-MGMT 597LGHumanitarian Logistics and Healthcare

Spring 2012c©Anna Nagurney 2012

Professor Anna Nagurney SCH-MGMT 597LG Humanitarian Logistics and Healthcare

This lecture is based on the following sources:

“Impacts of Funding Systems on Humanitarian Operations,” T.Wakolbinger and F. Toyasaki, Chapter 2 in Humanitarian Logistics,M. Christopher and P. Tatham, Editors, Kogan Page, 2011.

“Impacts of Earmarked Private Donations for DisasterFundraising,” F. Toyasaki and T. Wakolbinger, Annals ofOperations Research (2011), in press.

“An Analysis of Impacts Associated with Earmarked PrivateDonations for Disaster Relief,” F. Toyasaki and T. Wakolbinger,Computational Management Science Conference, Vienna, Austria,July 28-30, 2010.


Background

According to Wakolbinger and Toyasaki (2011): Funding systemsand financial flows play an important role in humanitarianoperations.

They directly and indirectly affect the scope, speed, effectivenessand efficiency of disaster response.

Despite the importance, constraints imposed by fundingsystems are often not considered in models of humanitariansupply chains.

Hence, the interdependencies of financial flows and material flowsshould be explored in the context of humanitarian relief operations.


The Humanitarian Funding System

Humanitarian Assistance: the aid and action designed to savelives, alleviate suffering and maintain and protect human dignityduring and in the aftermath of emergencies (Global HumanitarianAssistance (2008)).

Sources of Humanitarian Assistance• Public sources • Official sources

Intermediaries• Multilateral agencies like the World Bank • Internationalorganizations • Non-governmental organizations (NGOs)

Providers of Aid• International aid agencies • Local NGOs • Community-basedorganizations


The Role of NGOs

In 2005, between 48% and 58% of all known humanitarian fundingflowed through NGOs.

NGOs receive their funding from three sources:

1. Public fundraising (estimated annual average of $2 billion)2. Government agencies (estimated at $1.2 to $2 billion in 2004)3. Channeled UN funds (estimated at $500-800 million in 2004)

Many of the larger NGOs are trying to increase the proportioncoming from private sources.

Source: Feinstein International Center (2007)


Issues

• Current funding systems are one of the causes of inefficiencies inhumanitarian operations (Thomas and Kopzcak (2005)).

• The current funding systems cannot meet needs.Only about 30% of needs were not met each of the last three years(Development Initiatives (2009)).

• The need is expected to increase.

• The occurrence of disasters is expected to increase five-fold overthe next 50 years (Thomas and Kopczak (2005)).


Issues

• The number of aid agencies with a changing structure isincreasing

• Earmarking is increasing

• Donors are more informed and demanding.


Natural Disaster Damages

Source: CRED, Annual Disaster Statistical Review (2007)


What Are the Challenges

Aid agencies need to decide how to respond to these issues.

This requires understanding the relationship between funding andhumanitarian operations:“The need to develop betterunderstanding about how different financing mechanisms affectimpartial, timely and predictable response.” Good HumanitarianDonorship Initiative 2007.


Source: F. Toyasaki and T. Wakolbinger, “An Analysis of Impacts Associated with Earmarked Private Donations

for Disaster Relief,” Computational Management Science Conference, Vienna, Austria, July 28-30, 2010


Quantitative Modeling To Answer Some FundamentalQuestions

“Impacts of Earmarked Private Donations for DisasterFundraising,” F. Toyasaki and T. Wakolbinger, Annals ofOperations Research (2011), in press, is the first paper thatanalyzes the optimal fundraising strategies in the context offundraising for disaster relief operations:

• It studies the trade-off between size and flexibility;

• It addresses under which conditions earmarking of donations isbeneficial for donors, NGOs, and policy makers.


Decision-Makers’ Behavior

Donors maximize utility:

• Increasing in donations but at a decreasing rate • Substitutioneffect between donations to general fund and special fund

NGO maximizes impact of projects conducted:

• Increasing in donations to general fund • Increasing in donationsto special fund but at a decreasing rate


Mathematical Derivations

Source: “Impacts of Earmarked Private Donations for DisasterFundraising,” F. Toyasaki and T. Wakolbinger, Annals ofOperations Research (2011), in press.


Mathematical Derivations

Source: “Impacts of Earmarked Private Donations for DisasterFundraising,” F. Toyasaki and T. Wakolbinger, Annals ofOperations Research (2011), in press.


Donors’ View

Donors always prefer being given the option of earmarkingdonations.

• Each representative donors donation amount and utility arealways larger in the earmarking case than in the non-earmarkingcase.


Aid Agency’s View

Increased donor interest in donating money always encourages theaid agency to contact more donors when earmarking is not allowed.

Increased donor interest in donating money might lead to fewerdonors who should be contacted when earmarking is allowed.


Aid Agency’s View

In general, allowing for earmarking of donations tends to bebeneficial for aid agencies if target fundraising goal of specialproject is high.

However, allowing for earmarking of donations tends to be NOTbeneficial for aid agencies if • Donors willingness for donation tothe special project is relatively high, compared to target fundraisinggoal for special project • Fundraising costs are low.


Policy-Makers’ View

Allowing for earmarking of donations leads to increased fundraisingactivities (i.e., solicitation of donations) if

• Target fundraising goal for special project is high • Donorsinterest in donating money is relatively low, and • Fundraisingcosts are high.

Allowing for earmarking always achieves a lower fundraising costpercentage than not allowing for earmarking.


Impact of Uncertainty Concerning Amount of Donations

In the non-earmarking case, the aid agency’s

optimal level of solicited population,the expected donation amount, utility level,and fundraising cost percentageare the same in the case with certainty and the case withuncertainty concerning donation amounts.

In the earmarking case, theoptimal level of solicited population,the expected donation amount, utility level,and fundraising cost percentageare lower in the case of uncertainty than in the case ofcertainty concerning donors donation amount.


Recommendations

It is imperative that aid agencies use the available resources in themost efficient and effective way, due to the increasing demand fordisaster relief and the fact that resources are limited.

The misallocation of resources is partly caused by aid agencies’difficulty in determining the optimal allocation of resources. Thoseworking for aid agencies often are not aware of the value oflogistics, modeling, and information systems and, therefore, do notinvest sufficiently in these areas.

Many of the existing models may not capture financial constraints.


Recommendations

Donors provide resources for aid agencies and have a stronginfluence on the allocation decisions that aid agencies make.

Donors can directly impact allocation decisions by earmarkingdonations for certain emergencies or activities.They can also provide incentives that guide aid agencies towards acertain decision.

Currently, donors frequently explicitly and implicitly give incentivesfor aid agencies’ behavior that leads to too many resources beingallocated to direct response instead of to preparedness andreconstruction. Similarly, too many resources may be provided foremergencies getting a lot of media attention while others arelargely neglected.


Recommendations

Aid agencies, donors, and even UN agencies are increasingly awareof the shortcomings of the current funding systems.

Operations research and operations management tools cancontribute to establishing sound humanitarian fundingsystems.


Documents

Lecture 8: Earmarking and Financial Funds